Reichheld’s New Metric: The Net Promoter Score

Fred Reichheld stunned marketers in 1996 when he argued in The Loyalty Effect that a 5% improvement in retention can boost profits by up to 100%. Now he is about to shock them again. In his new book, The Ultimate Question, he urges firms to rethink the way they measure customer loyalty. Does that mean developing a dashboard with 30 items on it? No. As Reichheld sees it, the calculation can be reduced to a single metric based on a single survey question. The metric? The Net Promoter Score. The question? Would you recommend us to a friend?

Reichheld deserves a hearing. “The Loyalty Effect,” influenced a generation of business leaders. and Reichheld had a best-seller on his hands. He followed it up with Loyalty Rules. All of his books are published by Harvard Business School Press.

A Harvard MBA, Reichheld was a Bain & Co. partner until roughly ten years ago. He then made the decision to give that up and become the first Bain Fellow. As such, he devotes himself to writing and lecturing. We sat down with Reichheld last week to ask him about the ultimate question.

MarketingROI: What is this hot new metric you’re talking about?

Reichheld: Net worth is one of the fundamental measures in a business. What we’ve done is create the equivalent for customers. We’ve identified the assets in the customer base, and subtracted the liabilities. And we’ve done that by asking one question and deriving one statistic: the Net Promoter Score. The ultimate question is: How likely would you be to recommend us to a friend? People who score nines and tens are promoters. They account for 80% to 90% of the positive word of mouth. They generate the growth in business and make employees proud to be there. Passives are those who give you a seven or an eight. They’re perfectly satisfied for the moment, but they’ll switch to a competitor if something better comes along. Then are those who score zero through six. Those are failing grades. Those customers are detractors. They complain and will eventually defect. If you take the percentage of your customer base who are promoters, subtract the percent who are detractors, you come up with the net promoter score, or the net worth of your customer base.

MarketingROI: Don’t many firms already do satisfaction surveys?

Reichheld: Yes, but they have been a terrible disappointment. With just a few exceptions. they’re not done very effectively, and they have very low credibility where it counts. One leading investment bank looked at two years of institutional investor reports in which mutual funds explained why they invested in specific stocks. Out of the 8,000 filings, only six mentioned anything about customer satisfaction. Wall Street likes the idea, but it hasn’t seen any reliable data.

MarketingROI: But aren’t there a host of other metrics that can tell you how well you’re doing?

Reichheld: Companies have built complex dashboards full of interesting measures, some of which are very good, like retention rates and share of wallet. But they aren’t gathered in a precise, timely, granular fashion. And they don’t influence frontline priorities the way that profits do. Profits are gathered according to a set of carefully established principles. They’re taken seriously. But there’s a big difference between good profits and bad profits, and accountants can’t tell us that difference. Customers can tell us, but we just haven’t built the kinds of feedback tools that are strong enough to stand up to profitability.

MarketingROI: What are bad profits?

Reichheld: Bad profits are those you earn from any customer who gives you a zero-through-six when asked if they would recommend you to a friend. And they destroy a business.

MarketingROI: How so?

Reichheld: They create more detractors, and those detractors do several very specific things that destroy growth. They buy less stuff. They eventually defect. They give terrible word of mouth. And they make your employees embarrassed to work there. Companies can fake it for awhile. They can buy growth with more advertising, but they lose their ability to grow profitably. And there’s more to it than that. Business is the predominant institution in western society, but most citizens have a negative view of it. They think that they can’t trust it, and the reason is that bad profits have become so prevalent. You have the airlines hitting you with these fees, and rental car firms charging you a crazy amount for gas. Most companies are addicted to bad profits, and it’s not just hurting them, it’s hurting society by leading to calls for more regulation.